The chances of being audited by the IRS depend on a variety of different factors. Many business owners will go an entire lifetime without receiving a single audit, while others will face them every few years. Statistically speaking, 99 percent of returns will not be audited, which means that your chances of receiving one is a little like winning the lottery, unfortunately without the benefits that entail. Here are a number of factors that will substantially increase your chances of audited:
The Red Flags
There are three red flags that the IRS will look for when evaluating a return and these are: wealth, calculation errors and intentional actions which lead to fines. Individuals who do not report all their taxable income, or who list a bunch of deductions have an increased chance of being audited, as well as individuals who have a foreign bank account which is not reported.
Out of the three red flags, calculation errors are the most common category that the IRS has to deal with. While it is rare for the IRS to perform audits for errors which are beneficial to them, errors which benefit the tax payer can arouse suspicion. One of the simplest ways to avoid calculation errors when doing your taxes is to use tax calculation software – that way everything is automated and the math is done for you.
The IRS pays special attention to high net worth individuals. A billionaire has a much greater chance of being audited than someone who makes $50,000 per year, and it is safe to assume that the richest Americans are audited frequently. This is one of the few negative consequences of having tremendous wealth, particularly when that wealth is publicly known.
Generally speaking, the IRS considers wealthy people to be those who make a minimum of $100,000 per year. Research shows that such individuals have a much greater likelihood of being audited when compared to those that make less than $100,000 annually.
The rich receive more IRS audits because they make easy targets, and because the IRS must verify the source of their wealth. Those that come into wealth suddenly will arouse suspicion because it could be due to fraud or other criminal activities, and the IRS must verify where the funds came from. This is a typical issue among individuals who suddenly inherit wealth from a relative who has died and left behind an estate.
A Final Note
The IRS is a vast agency with enormous resources at its disposal. Its agents are trained to get the payments which are owed. Those that receive notice from the Internal Revenue Service should respond as quickly as possible. Should you find yourself in a situation where you’re faced with an audit, the best course of action is to speak with either your attorney or someone who is experienced in tax related matters so that they can walk you through the process and complexity of an audit. An audit is never a pleasant experience but with a professional by your side, it becomes a lot easier.